The Government has proposed a comprehensive rationalisation of Schedule XI of the Income-tax Act. These changes aim to eliminate outdated provisions, remove overlapping restrictions, and align income-tax rules with the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the EPF Scheme, 1952.
The amendments, introduced through Clause 111, will take effect from 1 April 2026 and apply from Tax Year 2026-27 onwards.
Why Rationalisation Was Needed
Schedule XI carried forward several legacy concepts that no longer fit within the evolved EPF regulatory framework. With the introduction of a uniform monetary ceiling of Rs 7.5 lakh on aggregate employer contributions under section 17(1)(h) of the Act, multiple percentage-based and parity-linked restrictions had become redundant, creating parallel and sometimes conflicting limits.
The proposed changes seek to bring clarity, consistency and regulatory harmony.
Key Changes Proposed in Schedule XI
1. Removal of Employer- Employee Contribution Parity Requirement: Paragraph 4(c) of Part A, which restricted employer contributions based on parity with employee contributions and required annual crediting, is proposed to be omitted. This restriction has become unnecessary due to the unified Rs 7.5 lakh monetary cap.
2. Clear Eligibility for Recognition of Provident Funds: Paragraph 4(f) of Part A will be amended to clarify that only provident funds that have obtained exemption under section 17 of the EPF Act can apply for recognition under the Income-tax Act. This ensures consistency between EPF and tax laws.
3. Omission of Discretionary Relaxation Based on Salary Thresholds: Paragraph 5(4) of Part A allowed relaxation of contribution parity based on outdated salary limits (Rs 500) or contingent bonus structures. Given the uniform employer contribution cap, this provision is proposed to be removed.
4. Deletion of 12% Salary-Based Deeming Provision: Paragraph 6(a) of Part A, which treated employer contributions exceeding 12% of salary as taxable income, is proposed to be omitted. This percentage-based ceiling overlaps with the monetary limit under section 17(1)(h).
5. Removal of Special Limits for Shareholder-Employees: Paragraph 1(d) of Part C prescribed separate contribution limits for employees who were also shareholders of the employer company. Since such a distinction is not recognised under the EPF framework and duplicates the Rs 7.5 lakh cap, this provision will be deleted.
6. Liberalisation of Investment Limits in Government Securities: Paragraph 1(e) of Part C restricted investment of provident fund monies in Government securities to 50%. This is inconsistent with current EPFO and Ministry of Labour investment norms. The proposal removes this rigid statutory cap while retaining oversight through EPF regulations.
Effective Date
All amendments will come into force from 1 April 2026 and apply to Tax Year 2026- 27 and subsequent years .
Impact and Takeaway
The rationalisation of Schedule XI marks a shift from rigid, percentage-based controls to a simplified, monetary-cap-driven framework. By aligning income-tax provisions with the prevailing EPF regime, the changes are expected to:
- Reduce compliance complexity
- Remove interpretational conflicts
- Provide greater flexibility to employers
- Strengthen regulatory consistency
For employers, employees, and tax professionals, this reform brings long-awaited clarity in the taxation and regulation of recognised provident funds.
Official copy of the Clause is as follows
Rationalisation of Schedule XI relating to Provident Funds
The provisions relating to recognised provident funds contained in Schedule XI to the Act carry forward certain legacy concepts that need alignment with the framework under the Employees’ Provident Funds and Miscellaneous Provisions Act, 1952 and the Employees’ Provident Fund Scheme, 1952. In view of the evolution of the provident fund regulatory regime and the introduction of an absolute monetary cap on employer contributions under section 17(1)(h) of the Act, it is proposed to rationalise and align the income-tax provisions
governing recognised provident funds with the prevailing EPF framework.
2. The provisions of paragraph 4(c) of Part A of Schedule XI of the Act restrict employer contributions by reference to parity with employee contributions and mandates annual crediting of such contributions. As a unified monetary ceiling of Rs 7.5 lakh on aggregate employer contributions has been prescribed under section 17(1)(h), it is proposed to omit Paragraph 4(c).
3. The provisions of paragraph 4(f) of Part A of Schedule XI govern eligibility for recognition of provident funds with reference to exemption from the EPF Scheme. It is proposed to amend Paragraph 4(f) to clarify that only provident funds which have obtained exemption under section 17 of the EPF Act may apply for recognition under the Income-tax Act.
4. The provisions of paragraph 5(4) of Part A of Schedule XI permit discretionary relaxation of employer- employee contribution parity based on a salary threshold of Rs 500 or contingent bonus structures. As a unified monetary ceiling of Rs 7.5 lakh on aggregate employer contributions has been prescribed under section 17(1)(h), it is proposed to omit Paragraph 4(c).
5. The provisions of paragraph 6(a) of Part A of Schedule XI deem employer contributions in excess of twelve per cent of salary as income of the employee. This percentage-based restriction overlaps with the unified monetary ceiling prescribed under section 17(1)(h), resulting in a parallel limitation. Therefore, it is proposed to omit Paragraph 6(a).
6. The provisions of paragraph 1(d) of Part C of Schedule XI prescribe differentiated limits for employees who are also shareholders of the employer company. Such a distinction is not recognised under the EPF Act or the EPF Scheme and overlaps with the unified monetary ceiling prescribed under section 17(1)(h). It is accordingly proposed to omit Paragraph 1(d) of Part C.
7. The provisions of paragraph 1(e) of Part C of Schedule XI restrict investment of provident fund monies in Government securities to fifty per cent. This ceiling is inconsistent with the current investment norms prescribed by the Ministry of Labour and Employment and the Employees’ Provident Fund Organisation, which permit higher exposure. It is proposed to amend Paragraph 1(e) to remove the rigid statutory cap, while retaining regulatory oversight through subordinate legislation under the EPF framework.
These amendments shall take effect from the 1st day of April, 2026, and shall apply in relation to the tax year 2026-27 and subsequent tax years.
[Clause 111]
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